Debt Relief 101: Debt Settlement vs. Debt Consolidation

Debt can sometimes be overwhelming especially if we do not have a good understanding of its nature and how it works. There are some people who have a lot of loans that may not have a means to pay them properly, and as a result, they sometimes even end up in deeper debt. In the world of finances, these situations can be resolved using some methods. Lenders often offer options such as debt settlement and debt consolidation for these situations.

Big Solutions, Big Responsibilities

Each of these choices offer convenient solutions that may or may not fit your current situation. This means whichever you choose between debt settlement and debt consolidation has to be fit for your financial plan, or else the entire ordeal will not be of any use.

Debt Settlement

Debt settlements are ways used by creditors to lessen their bending balances. This is sometimes also called debt arbitration or negotiation. In debt settlements, the agreement between the debtor and the creditor will be under the debt settlement company, a negotiator or even yourself.

• With debt settlement, the negotiator will offer the creditor an amount that can potentially be lower than the original amount of the debt. For example, if you have a debt amounting to $500, the debt settlement company or the negotiator will offer a lump-sum payment amounting to $250.

While this can be a convenient option for some, you have to be careful as this also has its own disadvantages.

• There are additional fees that can be added into your repayments. Your period to pay for all the payments may be increased from 24 to 36 months on some instances, but the fact remains that there are additional fees to be considered.
• Settlement companies often charge around 25% to the final settlement amount.
• It is also important to know that debt settlement has a direct and negative effect on your credit score. As a result, you may find it difficult to find other lenders in the near future.
• There are also tax consequences in this method since the IRS will count off the forgiven amount and will require you to add it up to your tax reports.

It is also important for you to know that creditors cannot be forced to work with a debt settlement company, which means lenders have a high chance of refusing suggestions of debt settlement.

Debt Consolidation

Debt consolidation can be considered an alternative to debt settlement. Unlike in the latter where the debt is “replaced,” in debt consolidation, your existing debt are “consolidated” into a new debt. This means your loans will be combined to form a single loan for you to pay. Though there are many options out there, you need to find the best debt consolidation loans that work for your budget.

• This can be a good option especially if you cannot manage scheduling repayments for all your existing debt.
• This is also helpful if you want a single loan to pay off for a period of time, instead of having multiple debts.

However, you also need to make sure that you can pay your new consolidated debt properly. It is important to note as well that debt consolidation will not decrease the amount of debt you have.

• Interest rates may also decrease a bit because of combining all the debt into one loan.
• Payment terms can be more flexible due to having to talk about a new loan once more.
• If you have a high credit score, you may be able to tip the scales in your favor by requesting for more favorable terms, such as lower interests, or longer repayment periods.

 

All in the Planning

 Do remember, however, that despite the option of being able to refinance or consolidate your loans, it is still essential that you find better ways of managing them. After all, debt consolidation or debt settlement is useless if you do not get to plan properly before acquiring these new loans.

• Before you consider getting any of these loans, try to assess your current loan condition and compare potential changes you may have to make to your budget and to your lifestyle.
• Consolidating or settling your debt may prolong the repayment period, which can be detrimental to your financial plans.

 

Which is much better?

In reality, it is hard to determine which is “much better” when it comes to debt settlement and debt consolidation. After all, this is all a matter of how you approach your debt, and which works best for you. However, debt consolidation is recommended by a lot of people, as it has the potential for the least negative effect in the debtor’s credit line compared to debt settlement.

The good thing is that there are a lot of alternatives that you could use to settle your loans, given the right strategy and planning. Always consider the perks and the risks between debt settlement and debt consolidation before making your choice.